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Real exchange rate dynamics in the presence of non-traded goods and transaction costs

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  • Lee, Inkoo
  • Shin, Jonghyup
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    Abstract

    This paper studies the role of non-traded goods and transaction costs in accounting for the puzzling behavior of real exchange rates. We show that introducing the transaction costs and non-traded goods in an otherwise standard competitive model dramatically improves its ability to rationalize observed real exchange rate dynamics.

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    File URL: http://www.sciencedirect.com/science/article/B6V84-4XW0089-1/2/f3cf81d2d991f8a194675cc9b591895b
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    Bibliographic Info

    Article provided by Elsevier in its journal Economics Letters.

    Volume (Year): 106 (2010)
    Issue (Month): 3 (March)
    Pages: 216-218

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    Handle: RePEc:eee:ecolet:v:106:y:2010:i:3:p:216-218

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    Web page: http://www.elsevier.com/locate/ecolet

    Related research

    Keywords: Real exchange rate Persistence Volatility Non-traded goods Transaction costs;

    References

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    1. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," International Trade 0012003, EconWPA.
    2. V.V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2002. "Can sticky price models generate volatile and persistent real exchange rates?," Staff Report 277, Federal Reserve Bank of Minneapolis.
    3. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
    4. Sercu, Piet & Uppal, Raman & Van Hulle, Cynthia, 1995. " The Exchange Rate in the Presence of Transaction Costs: Implications for Tests of Purchasing Power Parity," Journal of Finance, American Finance Association, vol. 50(4), pages 1309-19, September.
    5. Burstein, Ariel T. & Neves, Joao C. & Rebelo, Sergio, 2003. "Distribution costs and real exchange rate dynamics during exchange-rate-based stabilizations," Journal of Monetary Economics, Elsevier, vol. 50(6), pages 1189-1214, September.
    6. Mario J. Crucini & Chris I. Telmer & Marios Zachariadis, 2001. "Understanding European Real Exchange Rates," Vanderbilt University Department of Economics Working Papers 0120, Vanderbilt University Department of Economics.
    7. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
    8. Hummels, David, 1999. "Toward a Geography of Trade Costs," GTAP Working Papers 1162, Center for Global Trade Analysis, Department of Agricultural Economics, Purdue University.
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    Cited by:
    1. Fujisaki, Seiya, 2013. "Taylor rules and equilibrium determinacy in a two-country model with non-traded goods," Economic Modelling, Elsevier, vol. 35(C), pages 597-603.
    2. Lee, Inkoo, 2010. "Geographic price dispersion in retail markets: Evidence from micro-data," Journal of Macroeconomics, Elsevier, vol. 32(4), pages 1169-1177, December.

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